Brazilian policy officials insisted that the country had a bright outlook despite widespread uncertainty and mounting risks for the global economy.
Luciano Coutinho, president of the Brazilian development bank and one of the main policymakers in the Dilma Rousseffs administration told Emerging Markets that a moderation of China growth in fact creates a benign scenario for Brazil.
One deflationary factor for the global economy, which is particularly important to Brazil, is the deceleration of the Chinese economy. So with the Chinese economy growing less I dont see the Chinese economy moving back towards 10% a year, but if it stays at around 7% to 8%, commodity prices will be lower, Coutinho said.
Nevertheless if the deceleration were greater, Brazil could feel the impact in terms of export revenues, as commodities still account for a large part of its foreign sales.
China, which has become its main export destination, may also have a lesser appetite for Brazilian iron ore and soy beans. Terms of trade would not be as favourable to Brazil, but on the other hand, inflationary pressures would tend to abate. It is hard to see a strongly inflationary scenario, he said. The risks are more deflationary than inflationary, he said
Meanwhile, the Brazilian central bank has conducted one of the strongest series of interest cuts since August last year. During this period, it has slashed its Selic rate by 525 basis points to 7.25% per year.
The Brazilian government deliberately acted to put an end to decades of extremely high interest rates in order to favour investment in production and infrastructure.
This is a novelty in Brazil. This is the new scenario, Coutinho said. I am very confident that the process will move fast, because the main hindrance for a big participation of private sources in long term finance was the very high short term interest rates that we used to have, because you had nice yields with no risk with high liquidity.
That is heaven for savers, but it was an absolutely abnormal situation that lasted for decades. Now it is time to turn this page, he said.
Brazilian officials expect that the steep decline in interest rates may now lead institutional investors, pension funds and insurers which are now below their profitability targets, to diversify their sources of fixed income investments.
We have a chance to crowd in the market with new private assets, he said. Brazil recently launched a new concession programme in transport infrastructure that is intended to create a big wave of investment in infrastructure projects
There is no better alternative than sound infrastructure projects with high rates of return as a base for the ignition of new fixed income securities, or bonds.